FHA Losses Could Hit $115 Billion in Extreme Scenario

The Federal Housing Administration’s projected losses over 30 years could reach as high as $115 billion under a previously undisclosed “stress test” conducted last year to determine how the agency would fare under an extremely severe economic scenario, according to documents reviewed by a congressional committee.

The forecast was significantly worse than the most severe estimate included in the government mortgage-insurance agency’s independent actuarial review released last November. The FHA’s outside actuaries modeled the analysis along the lines of the annual stress test employed by the Federal Reserve Board, which gauges how the nation’s largest financial institutions would fare in the event of a significant economic shock. The FHA isn’t required to use the Fed test.

The findings are part of an investigation by the House Oversight and Government Reform Committee, headed by Rep. Darrell Issa (R., Calif.). In a letter sent last week, Mr. Issa asked Carol Galante, the FHA’s commissioner, why the agency hadn’t disclosed the figure, which he called “troubling.”

“We are reviewing this matter and will respond to the committee appropriately,” said Addie Whisenant, a spokeswoman for the Department of Housing and Urban Development, which oversees the FHA.

The FHA doesn’t make loans but insures lenders against losses on mortgages that meet its standards. It is required to maintain enough cash to pay for projected losses on all loans it insures. In its annual audit, the agency disclosed that under current conditions, its projected losses over 30 years would exceed its reserves by $13.5 billion.

A more recent analysis, released in April by the White House’s budget office, showed the agency would require $943 million this year due to losses in its reverse-mortgage program, which allows homeowners who are 62 years or older to take cash out of their homes. The FHA’s main mortgage program hasn’t required taxpayer support in its 79-year history.

Last fall’s annual report included several stress scenarios, but none of them showed losses as large as those contemplated by the Fed’s stress-test methodology. The most severe estimate of losses under a “protracted” economic “slump” would have resulted in a shortfall of $65.4 billion. The report was produced by Integrated Financial Engineering Inc. of Rockville, Md.

Emails reviewed by the House panel suggest the FHA didn’t want the bleaker forecast included due to the uproar it might create. Emails from FHA officials to IFE analysts in April 2012 initially floated the idea of using a stress-test scenario like the one conducted by the Fed to measure the costs of big unforeseen shocks, known as “tail risk.” When the FHA’s report was being finalized last October, the IFE analysts didn’t include the figure despite having referenced it in earlier drafts. Instead, officials went with the “protracted slump” forecast.

In an email last October to an IFE analyst, a senior FHA official said that while the agency still wanted to present the results of the Fed stress test to other government agencies, “we just do not want that analysis to be in the actuarial review report.” The email continued: “In Congressional hearings, it is quite possible that we will be required to present this information on-the-record, but that will be well after the actuarial review is released and the initial media coverage takes place.”

Former agency officials defended that decision on the ground that the housing market was already recovering, which made the more severe stress test less relevant. Including the more negative scenario would have been “excessive,” said David Stevens, chief executive of the Mortgage Bankers Association, who headed the FHA for two years ending in 2011.

Mr. Issa also sent a letter to IFE seeking further information on the report.

“IFE was not coerced by the agency to change its conclusions or its evaluating methods,” said Stephen Ryan, a lawyer representing IFE. “We look forward to working with Chairman Issa’s staff to share our views with them.”

The FHA has played a key role in supporting the housing market by backing mortgages to borrowers who make down payments of as little as 3.5%—loans that most private lenders won’t offer without a government guarantee. The FHA accounted for one-third of loans used to purchase homes last year among owner-occupants. The agency has steadily boosted its fees to replenish dwindling reserves, and more recent loans are showing much better performance.